**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 
| **ý**                                                                                                                                                                                                                                                                                           | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                 |
| **For  the quarterly period ended February 29, 2004**                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                 |
| **or**                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                                                                                                                | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                 |
| **for  the transition period from                       to                     .** |

 

**Commission FileNumber:   0-12395**

 

**ALCIDE CORPORATION**

 

| **Delaware**                                                                                                         |   | **22-2445061**                        |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| State or other  jurisdiction of incorporation or organization                                                        |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                 |   |                                  |
| **8561  154th Avenue North East, Redmond WA**                                                                        |   | **98052**                             |
| (Address of  principal executive offices)                                                                            |   | (Zip Code)                            |
|                                                                                                                 |   |                                  |
| Registrant’s telephone  number, including area code       **(425) 882-2555** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES                          ý            NO          o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

YES         o            NO          ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as ofFebruary 29, 2004:  2,697,396, net ofTreasury Stock.

 

 

----

 

**ALCIDECORPORATION**

 

**INDEX**

 
| PART I.                                                                                             | FINANCIAL INFORMATION                                                                                                           |   |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                |                                                                                                                            |
| Item 1. Financial  Statements (unaudited)                                                           |                                                                                                                            |
|                                                                                                |                                                                                                                            |
|                                                                                                | Condensed Consolidated  Balance Sheets — February 29, 2004 and May 31, 2003                                                |   |
|                                                                                                |                                                                                                                            |
|                                                                                                | Condensed  Consolidated Statements of Operations - For the three and nine months ended  February 29, 2004 and February 28, 2003 |   |
|                                                                                                |                                                                                                                            |
|                                                                                                | Condensed  Consolidated Statements of Shareholders’ Equity                                                                 |   |
|                                                                                                |                                                                                                                            |
|                                                                                                | Condensed  Consolidated Statements of Cash Flows - For the nine months ended February  29, 2004 and February 28, 2003           |   |
|                                                                                                |                                                                                                                            |
|                                                                                                | Notes to Unaudited Condensed Consolidated  Financial Statements                                                                 |   |
|                                                                                                |                                                                                                                            |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                                            |
|                                                                                                |                                                                                                                            |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 |                                                                                                                            |
|                                                                                                |                                                                                                                            |
| Item 4. Controls and Procedures                                                                     |                                                                                                                            |
|                                                                                                |                                                                                                                            |
| PART II.                                                                                            | OTHER INFORMATION                                                                                                               |   |
|                                                                                                |                                                                                                                            |
| Item 1. Legal Proceedings                                                                           |                                                                                                                            |
|                                                                                                |                                                                                                                            |
| Item 5. Other Information                                                                           |                                                                                                                            |
|                                                                                                |                                                                                                                            |
| Item 6. Exhibits and Reports on Form 8-K                                                            |                                                                                                                            |
|                                                                                                |                                                                                                                            |
| SIGNATURE                                                                                           |                                                                                                                            |

 

2

----

 

**ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                |   | **February 29, 2004** |           | **May 31, 2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|----------------|------------------|------------|
| **Assets:**                                                                                                                                                                         |   |                  |           |             |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Current  assets:                                                                                                                                                                    |   |                  |           |             |       |
| Cash and cash equivalents                                                                                                                                                           |   | $                     | 4,567,517      |             | $          | 2,286,641 |   |
| Accounts receivable – trade, net                                                                                                                                               |   | 3,612,352             |           | 3,831,527        |       |
| Inventory                                                                                                                                                                           |   | 1,863,547             |           | 2,097,097        |       |
| Deferred and prepaid income taxes                                                                                                                                                   |   | 163,126               |           | 243,413          |       |
| Spare parts                                                                                                                                                                         |   | 1,119,037             |           | 884,226          |       |
| Prepaid expenses and other current assets                                                                                                                                           |   | 465,408               |           | 468,863          |       |
| Total  current assets                                                                                                                                                               |   | 11,790,987            |           | 9,811,767        |       |
| Equipment and leasehold improvements:                                                                                                                                               |   |                  |           |             |       |
| SANOVA plant assets                                                                                                                                                                 |   | 18,026,583            |           | 17,037,502       |       |
| Construction in progress                                                                                                                                                            |   | 2,906,229             |           | 2,596,332        |       |
| Office equipment                                                                                                                                                                    |   | 681,713               |           | 567,158          |       |
| Laboratory, manufacturing equipment and  vehicles                                                                                                                                   |   | 577,916               |           | 523,718          |       |
| Leasehold improvements                                                                                                                                                              |   | 90,463                |           | 73,483           |       |
| Less:  Accumulated depreciation and amortization                                                                                                                               |   | (12,304,215           | )              | (9,790,948       | )          |
| Total equipment and leasehold  improvements, net                                                                                                                                    |   | 9,978,689             |           | 11,007,245       |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Goodwill                                                                                                                                                                            |   | 478,807               |           | 478,807          |       |
| Other assets                                                                                                                                                                        |   | 70,885                |           | 70,885           |       |
| **Total Assets**                                                                                                                                                                    |   | **$**                 | **22,319,368** | ** **       | **$**      | **21,368,704** | ** ** |
|                                                                                                                                                                                |   |                  |           |             |       |
| **Liabilities and Shareholders’ Equity:**                                                                                                                                      |   |                  |           |             |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Current liabilities:                                                                                                                                                                |   |                  |           |             |       |
| Accounts payable                                                                                                                                                                    |   | $                     | 914,213        |             | $          | 686,391 |   |
| Accrued expenses                                                                                                                                                                    |   | 412,911               |           | 501,578          |       |
| Income taxes payable                                                                                                                                                                |   | 2,325                 |           | 115,300          |       |
| Total current liabilities                                                                                                                                                           |   | 1,329,449             |           | 1,303,269        |       |
| Deferred tax  liability                                                                                                                                                             |   | 596,817               |           | 565,287          |       |
| Other long-term  liabilities                                                                                                                                                        |   | —                |           | 8,140            |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| **Total Liabilities**                                                                                                                                                               |   | **1,926,266**         | ** **     | **1,876,696**    | ** ** |
|                                                                                                                                                                                |   |                  |           |             |       |
| Commitments and Contingencies                                                                                                                                                       |   |                  |           |             |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Redeemable Class “B” Preferred Stock -  $.01 par value;authorized  10,000,000 shares; issued and outstanding: February 29, 2004 – 60,663; May 31, 2003 – 63,675 |   | 159,239               |           | 167,145          |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Shareholders’ equity:                                                                                                                                                          |   |                  |           |             |       |
| Class “A” Preferred Stock - no par value,  authorized 1,000 shares; issued and outstanding February 29, 2004 – 138; May  31, 2003 - 138                              |   | 18,636                |           | 18,636           |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Common Stock - $.01 par value; authorized  10,000,000 shares; issued: February 29, 2004 – 3,083,355; May 31, 2003 –  3,040,597                                            |   | 30,833                |           | 30,406           |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| Common treasury stock at  costFebruary 29, 2004 –  385,959;May 31, 2003 - 385,959                                                                                              |   | (7,260,041            | )              | (7,260,041       | )          |
|                                                                                                                                                                                |   |                  |           |             |       |
| Additional paid-in capital                                                                                                                                                          |   | 22,049,051            |           | 21,502,828       |       |
| Retained earnings                                                                                                                                                                   |   | 5,395,384             |           | 5,033,034        |       |
| **Total Shareholders’ Equity**                                                                                                                                                 |   | 20,233,863            |           | 19,324,863       |       |
|                                                                                                                                                                                |   |                  |           |             |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                 |   | **$**                 | **22,319,368** | ** **       | **$**      | **21,368,704** | ** ** |

 

See notes to Unaudited CondensedConsolidated Financial Statements.

 

3

----

 

**ALCIDECORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
|                                                                             |   | **For the  Three Months Ended  February 29 and 28,** |      | **For the  Nine Months Ended  February 29 and 28,** |   |
|----------------------------------------------------------------------------------|--------|------------------------------------------------------|-----------|-----------------------------------------------------|--------|
|                                                                             |   | **2004**                                             |      | **2003**                                            |   | **2004** |   | **2003** |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Revenue:                                                                         |   |                                                 |      |                                                |   |   |   |   |   |
| Net sales                                                                        |   | $                                                    | 5,521,818 |                                                | $      | 5,172,872 |   | $ | 16,352,317 |   | $ | 15,736,462 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| License revenue                                                                  |   | 321,974                                              |      | 330,722                                             |   | 917,387 |   | 590,876 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Total revenue                                                                    |   | 5,843,792                                            |      | 5,503,594                                           |   | 17,269,704 |   | 16,327,338 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Expenditures:                                                                    |   |                                                 |      |                                                |   |   |   |   |   |
| Cost of goods sold, exclusive ofimpairment  charges                              |   | 3,432,322                                            |      | 3,098,205                                           |   | 10,019,419 |   | 8,990,139 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Impairment of SANOVA plant assets                                                |   | —                                               |      | 8,460                                               |   | 337,816 |   | 61,761 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Research and development expense                                                 |   | 550,180                                              |      | 520,678                                             |   | 1,499,771 |   | 1,674,636 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Consulting expense to related parties                                            |   | 15,000                                               |      | 15,000                                              |   | 45,000 |   | 45,000 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Selling, general and administrative  expense                                     |   | 1,542,210                                            |      | 1,430,379                                           |   | 4,855,250 |   | 4,355,957 |   |
| Total expenditures                                                               |   | 5,539,712                                            |      | 5,072,722                                           |   | 16,757,256 |   | 15,127,493 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Operating income                                                                 |   | 304,080                                              |      | 430,872                                             |   | 512,448 |   | 1,199,845 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Interest income                                                                  |   | 5,772                                                |      | 5,945                                               |   | 14,036 |   | 20,013 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Interest expense                                                                 |   | —                                               |      | (15,219                                             | )      | — |   | (53,072 | ) |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Other income                                                                     |   | 10,285                                               |      | 8,862                                               |   | 30,977 |   | 27,646 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Income before provision for income taxes                                         |   | 320,137                                              |      | 430,460                                             |   | 557,461 |   | 1,194,432 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Provision for income taxes                                                       |   | 112,047                                              |      | 150,661                                             |   | 195,111 |   | 418,051 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Net income                                                                       |   | $                                                    | 208,090   |                                                | $      | 279,799 |   | $ | 362,350 |   | $ | 776,381 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Basic earnings per common share                                                  |   | $                                                    | .08       |                                                | $      | .11 |   | $ | .14 |   | $ | .29 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Diluted earnings per common share                                                |   | $                                                    | .08       |                                                | $      | .10 |   | $ | .14 |   | $ | .29 |   |
|                                                                             |   |                                                 |      |                                                |   |   |   |   |   |
| Weighted average common stock and dilutive  potential common shares outstanding: |   |                                                 |      |                                                |   |   |   |   |   |
| Basic                                                                            |   | 2,689,704                                            |      | 2,659,910                                           |   | 2,666,339 |   | 2,657,352 |   |
| Diluted                                                                          |   | 2,712,728                                            |      | 2,682,765                                           |   | 2,680,147 |   | 2,681,962 |   |

 

See notes to UnauditedCondensed Consolidated Financial Statements.

 

4

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**ALCIDECORPORATION**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

 
|                                           |   |                                     |   |              |   | **Additional** |      |                       |   |         |   | **Total**              |       |
|------------------------------------------------|--------|------------------------------------------|--------|-------------------|--------|----------------|-----------|----------------------------|--------|--------------|--------|------------------------|------------|
|                                           |   | **Class “A”  Preferred Stock** |   | **Common  Stock** |   | **Paid-in**    |      | **Common  Treasury Stock** |   | **Retained** |   | **Shareholders’** |       |
|                                           |   | **Shares**                               |   | **Amount**        |   | **Shares**     |      | **Amount**                 |   | **Capital**  |   | **Shares**             |       | **Amount** |   | **Earnings** |   | **Equity** |   |
| Balance May 31, 2003                           |   | 138                                      |   | $                 | 18,636 |           | 3,040,597 |                       | $      | 30,406       |   | $                      | 21,502,828 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,033,034 |   | $ | 19,324,863 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Net income                                     |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   | 92,767 |   | 92,767 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Balance August 31, 2003                        |   | 138                                      |   | $                 | 18,636 |           | 3,040,597 |                       | $      | 30,406       |   | $                      | 21,502,828 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,125,801 |   | $ | 19,417,630 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Exercise of stock options                      |   |                                     |   |              |   | 400            |      | 4                          |   | 4,771        |   |                   |       |   |   |   |   | 4,775 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Tax benefit from exercise of stock options     |   |                                     |   |              |   |           |      |                       |   | 339          |   |                   |       |   |   |   |   | 339 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Net income                                     |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   | 61,493 |   | 61,493 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Balance November 30, 2003                      |   | 138                                      |   | $                 | 18,636 |           | 3,040,997 |                       | $      | 30,410       |   | $                      | 21,507,938 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,187,294 |   | $ | 19,484,237 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Exercise of stock options                      |   |                                     |   |              |   | 21,693         |      | 217                        |   | 234,531      |   |                   |       |   |   |   |   | 234,748 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Stock issued to employee stock ownership  plan |   |                                     |   |              |   | 20,665         |      | 206                        |   | 303,569      |   |                   |       |   |   |   |   | 303,775 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Tax benefit from exercise of stock options     |   |                                     |   |              |   |           |      |                       |   | 3,013        |   |                   |       |   |   |   |   | 3,013 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Net income                                     |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   | 208,090 |   | 208,090 |   |
|                                           |   |                                     |   |              |   |           |      |                       |   |         |   |                   |       |   |   |   |   |   |   |
| Balance February 29, 2004                      |   | 138                                      |   | $                 | 18,636 |           | 3,083,355 |                       | $      | 30,833       |   | $                      | 22,049,051 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,395,384 |   | $ | 20,233,863 |   |

 

See notes to UnauditedCondensed Consolidated Financial Statements.

 

5

----

 

**ALCIDE CORPORATION UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **For the Nine Months Ended  February 29 and 28,** |      |
|------------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|
|                                                                               |   | **2004**                                           |      | **2003** |   |
| Cash Flows from  Operating Activities:                                             |   |                                               |      |   |   |
| Net income                                                                         |   | $                                                  | 362,350   |   | $ | 776,381 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                                               |      |   |   |
|                                                                               |   |                                               |      |   |   |
| Depreciation                                                                       |   | 2,877,855                                          |      | 2,718,253 |   |
|                                                                               |   |                                               |      |   |   |
| Asset impairment  charges                                                          |   | 337,816                                            |      | 61,761 |   |
|                                                                               |   |                                               |      |   |   |
| Loss on disposal  of assets                                                        |   | 16,911                                             |      | — |   |
|                                                                               |   |                                               |      |   |   |
| Tax benefit from  exercise of stock options                                        |   | 3,352                                              |      | 9,392 |   |
|                                                                               |   |                                               |      |   |   |
| Deferred income  taxes                                                             |   | 49,678                                             |      | 418,659 |   |
|                                                                               |   |                                               |      |   |   |
| Common stock  issued to employee stock ownership plan                              |   | 303,775                                            |      | 53,906 |   |
|                                                                               |   |                                               |      |   |   |
| Decrease  (increase) in assets:                                                    |   |                                               |      |   |   |
| Accounts  receivable – trade, net                                             |   | 219,175                                            |      | (1,006,450 | ) |
| Inventory                                                                          |   | 233,550                                            |      | (191,847 | ) |
| Prepaid income  taxes                                                              |   | 62,139                                             |      | 195,000 |   |
| Spare parts                                                                        |   | (234,811                                           | )         | (186,188 | ) |
| Prepaid expenses  and other current assets                                         |   | 3,455                                              |      | 88,852 |   |
| Other assets                                                                       |   | —                                             |      | 3,539 |   |
|                                                                               |   |                                               |      |   |   |
| Increase  (decrease) in liabilities:                                               |   |                                               |      |   |   |
| Accounts payable                                                                   |   | 227,822                                            |      | 66,560 |   |
| Accrued expenses                                                                   |   | (88,667                                            | )         | (241,398 | ) |
| Income taxes  payable                                                              |   | (112,975                                           | )         | — |   |
| Other long-term  liabilities                                                       |   | (8,140                                             | )         | (26,346 | ) |
| Net cash provided  by operating activities                                         |   | 4,253,285                                          |      | 2,740,074 |   |
|                                                                               |   |                                               |      |   |   |
| Cash Flows from  Investing Activities:                                             |   |                                               |      |   |   |
| Acquisition of  equipment                                                          |   | (2,204,026                                         | )         | (1,904,794 | ) |
|                                                                               |   |                                               |      |   |   |
| Cash Flows from  Financing Activities:                                             |   |                                               |      |   |   |
| Redemption of  Class “B” Preferred Stock                                 |   | (7,906                                             | )         | (12,469 | ) |
| Exercise of stock  options                                                         |   | 239,523                                            |      | 53,205 |   |
| Net cash provided  by financing activities                                         |   | 231,617                                            |      | 40,736 |   |
|                                                                               |   |                                               |      |   |   |
| Net increase in  cash and cash equivalents                                         |   | 2,280,876                                          |      | 876,016 |   |
| Cash and cash  equivalents at beginning of period                                  |   | 2,286,641                                          |      | 2,847,581 |   |
| Cash and cash  equivalents at end of period                                        |   | $                                                  | 4,567,517 |   | $ | 3,723,597 |   |
|                                                                               |   |                                               |      |   |   |
| Supplemental  Disclosures of Cash Flow Information:                                |   |                                               |      |   |   |
| Cash paid during  the period for income taxes                                      |   | $                                                  | 183,366   |   | $ | 10,000 |   |
| Cash paid during  the period for interest                                          |   | $                                                  | —    |   | $ | 53,072 |   |

 

See notes to Unaudited Condensed ConsolidatedFinancial Statements.

 

6

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ALCIDE CORPORATION

NOTESTO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                     Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensedconsolidated financial statements of Alcide Corporation (the “Company”) for thethree and nine month periods ended February 29, 2004 and February 28, 2003 havebeen prepared in accordance with the instructions to Form 10-Q.  Certain information and disclosures normallyincluded in notes to financial statements have been condensed or omittedaccording to the rules and regulations of the Securities and ExchangeCommission, although the Company believes that the disclosures are adequate tomake the information presented not misleading. The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the financial statements contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended May 31,2003.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements contain alladjustments (consisting of only normal recurring accruals) considered necessaryfor a fair presentation.  Certainreclassifications have been made to prior year financial statements to conformto current year presentation. The results of operations for the interim periodsare not necessarily indicative of the results to be expected for the full year.

 

Stock Option Plans

 

The Company has two stock option plans that allow granting of optionsto employees, officers, directors and consultants.  Options granted to directors vest immediately while all otheroptions vest evenly over a five-year period. As allowed by Financial Accounting Standards Board Statement No. 123,“Accounting for Stock-Based Compensation” (SFAS 123) and Statement No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS148), the Company accounts for its stock option plans under the guidelines ofAccounting Principles Board Opinion No. 25, “Accounting for Stock issued toEmployees” (APB 25).

 

The following table illustrates the effect on net income and earningsper share as if the Company had applied the fair value recognition provisionsof SFAS 123.

 
|                                                                                                                                                |   | **Three  Months Ended********February  29 and 28,** |    | **Nine  Months Ended********February  29 and 28,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|----------------------------------------------------|--------|
|                                                                                                                                                |   | **2004**                                            |    | **2003**                                           |   | **2004** |   | **2003** |   |
|                                                                                                                                                |   |                                                |    |                                               |   |   |   |   |   |
| Net income, as reported                                                                                                                             |   | $                                                   | 208,090 |                                               | $      | 279,799 |   | $ | 362,350 |   | $ | 776,381 |   |
|                                                                                                                                                |   |                                                |    |                                               |   |   |   |   |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | 112,800                                             |    | 121,700                                            |   | 348,300 |   | 363,800 |   |
|                                                                                                                                                |   |                                                |    |                                               |   |   |   |   |   |
| Pro forma net income                                                                                                                                |   | $                                                   | 95,290  |                                               | $      | 158,099 |   | $ | 14,050 |   | $ | 412,581 |   |
|                                                                                                                                                |   |                                                |    |                                               |   |   |   |   |   |
| Earnings per share                                                                                                                                  |   |                                                |    |                                               |   |   |   |   |   |
| Basic — as reported                                                                                                                            |   | $                                                   | .08     |                                               | $      | .11 |   | $ | .14 |   | $ | .29 |   |
| Basic — pro forma                                                                                                                              |   | .04                                                 |    | .06                                                |   | .01 |   | .16 |   |
|                                                                                                                                                |   |                                                |    |                                               |   |   |   |   |   |
| Diluted — as reported                                                                                                                          |   | .08                                                 |    | .10                                                |   | .14 |   | .29 |   |
| Diluted — pro forma                                                                                                                            |   | .04                                                 |    | .06                                                |   | .01 |   | .15 |   |

 

7

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Recently issued accounting pronouncements

 

In May 2003, the EITF issued a final consensus on Issue 01-8,“Determining Whether an Arrangement Contains a Lease.”  Issue 01-8 provides guidance on determiningwhether an arrangement is or includes a lease within the scope of SFAS No. 13“Accounting for Leases.”  If it isdetermined that a lease exists, the lease and non-lease components of acombined sales arrangement must be accounted for separately.  Issue 01-8 is effective prospectively forarrangements entered into, modified, or acquired in fiscal periods beginningafter May 28, 2003.

 

Management has determined that at this time the revenue derived fromthe lease component in connection with SANOVA contracts is not material and,therefore, the Company has not separately reported lease revenue.  If in the future, the amount becomesmaterial and Issue 01-8 does not change the definition of a “lease”, theCompany will be required to separately report lease revenue.

 

2.            Accounts Receivable— Trade, Net consisted of the following:

 
|                                        |   | **February 29, 2004** |      | **May 31, 2003** |   |
|---------------------------------------------|--------|-----------------------|-----------|------------------|--------|
| Domestic Distributors                       |   | $                     | 308,803   |             | $      | 372,837 |   |
| International Distributors                  |   | 1,100,538             |      | 1,402,504        |   |
| SANOVA Customers                            |   | 2,109,031             |      | 1,888,840        |   |
| Other Receivables                           |   | 93,980                |      | 167,346          |   |
| Total Accounts Receivable – Trade, Net |   | $                     | 3,612,352 |             | $      | 3,831,527 |   |

 

The Company evaluates impairment of its trade receivables on a regularbasis.  The allowance for doubtfulaccounts was $28,000 as of February 29, 2004 and May 31, 2003, respectively,which was estimated based on collection history and known events.

 

3.                                     Inventory consisted of the following:

 
|                               |   | **February 29, 2004** |      | **May 31, 2003** |   |
|------------------------------------|--------|-----------------------|-----------|------------------|--------|
| Raw Materials                      |   | $                     | 510,894   |             | $      | 692,480 |   |
| Finished Products                  |   | 540,224               |      | 484,426          |   |
| SANOVA Inventory at Customer Sites |   | 812,429               |      | 920,191          |   |
| Total Inventory                    |   | $                     | 1,863,547 |             | $      | 2,097,097 |   |

 

4.                                     Commitments and Contingencies

 

As of February 29, 2004, the Company had contracts for future startupsof three poultry and eight red meat processing operations.  These systems are expected to be installedin the fourth quarter of fiscal 2004 and first quarter of fiscal 2005 at anapproximate total cost of $1,220,000. As of February 29, 2004, approximately $840,000 of the equipmentrequired for these installations was on hand. Subsequent to the end of the quarter, contracts were signed for onepoultry plant and thirteen red meat plants. The cost for these systems is expected to be about $1,800,000.  Approximately $400,000 of the equipmentrequired for these installations had been purchased as of February 29, 2004.

 

5.               Earnings PerShare

 

Basic earnings pershare is computed by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is computed by dividing net income by theweighted average number of common shares and potential common sharesoutstanding during the period. Potential common shares of the Company includethe dilutive effect of outstanding stock options and warrants. For the threeand nine month periods ended February 29, 2004, potential common sharesexcluded because of

 

8

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their antidilutive effect were 239,326 and 246,727 sharesrespectively.  For the three and ninemonth periods ended February 28, 2003, 260,392 and 242,892 shares wereexcluded, respectively.

 

Basic and dilutedearnings per share were calculated as follows:

 
|                                                                                                                                                                     |   | **Three  Months Ended  February 29 and 28,** |    | **Nine  Months Ended  February 29 and 28,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                                                                                     |   | **2004**                                     |    | **2003**                                    |   | **2004** |   | **2003** |   |
|                                                                                                                                                                     |   |                                         |    |                                        |   |   |   |   |   |
| Net income                                                                                                                                                               |   | $                                            | 208,090 |                                        | $      | 279,799 |   | $ | 362,350 |   | $ | 776,381 |   |
| Weighted average number of common shares outstanding                                                                                                                     |   | 2,689,704                                    |    | 2,659,910                                   |   | 2,666,339 |   | 2,657,352 |   |
|                                                                                                                                                                     |   |                                         |    |                                        |   |   |   |   |   |
| Basic earnings per share                                                                                                                                                 |   | $                                            | .08     |                                        | $      | .11 |   | $ | .14 |   | $ | .29 |   |
| Assuming exercise of options and warrants reduced by the number of  shares which could have been purchased with the proceeds from exercise of  such options and warrants |   | 23,024                                       |    | 22,855                                      |   | 13,808 |   | 24,610 |   |
| Weighted average common shares outstanding and dilutive potential  common shares                                                                                         |   | 2,712,728                                    |    | 2,682,765                                   |   | 2,680,147 |   | 2,681,962 |   |
|                                                                                                                                                                     |   |                                         |    |                                        |   |   |   |   |   |
| Diluted earnings per share                                                                                                                                               |   | $                                            | .08     |                                        | $      | .10 |   | $ | .14 |   | $ | .29 |   |

 

6.               Orders for Future Delivery

 

At February 29, 2004 andFebruary 28, 2003, the Company had orders for future delivery of $263,087 and$430,918, respectively.  The $263,087orders for future delivery are scheduled for shipment in March 2004.  Data for both years excludes expected salesof SANOVA because contracts with SANOVA customers do not require placement ofpurchase orders for future delivery.

 

7.               Segment Information

 

The Companyfollows the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 131, “Disclosures about Segments of an Enterprise and Related Information”and reports segment information in the same format as reviewed by the Company’smanagement (the “Management Approach”), which is organized around differencesin products and services.  Managementhas determined the Company has two reportable segments, Animal Health andSurface Disinfectants and SANOVA Food Antimicrobial Products.

 

The Company’sreportable segments are strategic business units that offer similar products,but to entirely different customers at substantially different selling pricesand cost of goods sold structures.  TheCompany does not have any inter-segment revenues.

 

The accountingpolicies of the segments are the same as those described in Note 2 — Summary ofSignificant Accounting Policies in the Company’s May 31, 2003 Form 10-K.  The Company evaluates performance based ongross margin from the sale of each segment’s products and does not allocateexpenses beyond gross margin to the two segments.

 

9

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Segment net sales, gross margin, assets, fixed asset additions anddepreciation expense are as follows:

 
|                                     |   | **Three Months Ended  February 29 and 28,** |    | **Nine Months Ended  February 29 and 28,** |   |
|------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------------|--------|
|                                     |   | **2004**                                    |    | **2003**                                   |   | **2004** |   | **2003** |   |
| Animal Health and  Surface Disinfectants |   |                                        |    |                                       |   |   |   |   |   |
| License Revenue – U.S.              |   | $                                           | 321,974 |                                       | $      | 330,722 |   | $ | 917,387 |   | $ | 590,876 |   |
| Net Sales - U.S.                         |   | 768,440                                     |    | 878,954                                    |   | 2,267,233 |   | 2,384,374 |   |
| Net Sales - International                |   | 1,030,101                                   |    | 1,070,183                                  |   | 3,051,987 |   | 3,230,895 |   |
| Total Revenue                            |   | 2,120,515                                   |    | 2,279,859                                  |   | 6,236,607 |   | 6,206,145 |   |
| Gross Margin                             |   | 1,256,354                                   |    | 1,395,902                                  |   | 3,772,610 |   | 3,654,518 |   |
|                                     |   |                                        |    |                                       |   |   |   |   |   |
| Assets (at end of period)                |   | 3,043,113                                   |    | 3,359,538                                  |   | 3,043,113 |   | 3,359,538 |   |
| Fixed Asset Additions                    |   | —                                      |    | —                                     |   | — |   | — |   |
| Depreciation Expense                     |   | 1,344                                       |    | 1,344                                      |   | 4,032 |   | 4,032 |   |
|                                     |   |                                        |    |                                       |   |   |   |   |   |
| SANOVA Food  Antimicrobial Products      |   |                                        |    |                                       |   |   |   |   |   |
| Net Sales - U.S.                         |   | 3,723,277                                   |    | 3,223,735                                  |   | 11,033,097 |   | 10,121,193 |   |
| Gross Margin, before impairment          |   | 1,155,116                                   |    | 1,009,487                                  |   | 3,477,675 |   | 3,682,681 |   |
| Gross Margin, after impairment           |   | 1,155,116                                   |    | 1,001,027                                  |   | 3,139,859 |   | 3,620,920 |   |
|                                     |   |                                        |    |                                       |   |   |   |   |   |
| Assets (at end of period)                |   | 13,742,632                                  |    | 14,996,925                                 |   | 13,742,632 |   | 14,996,925 |   |
| Fixed Asset Additions                    |   | 536,514                                     |    | 438,700                                    |   | 2,127,321 |   | 1,822,116 |   |
| Depreciation Expense                     |   | 879,103                                     |    | 903,852                                    |   | 2,778,712 |   | 2,627,790 |   |
|                                     |   |                                        |    |                                       |   |   |   |   |   |
| Not Segment Related                      |   |                                        |    |                                       |   |   |   |   |   |
| Assets (at end of period)                |   | 5,533,623                                   |    | 4,678,765                                  |   | 5,533,623 |   | 4,678,765 |   |
| Fixed Asset Additions                    |   | 7,277                                       |    | 4,468                                      |   | 76,705 |   | 82,678 |   |
| Depreciation Expense                     |   | 32,349                                      |    | 29,908                                     |   | 95,111 |   | 86,431 |   |
|                                     |   |                                        |    |                                       |   |   |   |   |   |
| Total                                    |   |                                        |    |                                       |   |   |   |   |   |
| License Revenue                          |   | 321,974                                     |    | 330,722                                    |   | 917,387 |   | 590,876 |   |
| Net Sales                                |   | 5,521,818                                   |    | 5,172,872                                  |   | 16,352,317 |   | 15,736,462 |   |
| Total Revenue                            |   | 5,843,792                                   |    | 5,503,594                                  |   | 17,269,704 |   | 16,327,338 |   |
| Gross Margin                             |   | 2,411,470                                   |    | 2,396,929                                  |   | 6,912,469 |   | 7,275,438 |   |
|                                     |   |                                        |    |                                       |   |   |   |   |   |
| Assets (at end of period)                |   | 22,319,368                                  |    | 23,035,228                                 |   | 22,319,368 |   | 23,035,228 |   |
| Fixed Asset Additions                    |   | 543,791                                     |    | 443,168                                    |   | 2,204,026 |   | 1,904,794 |   |
| Depreciation Expense                     |   | 912,796                                     |    | 935,104                                    |   | 2,877,855 |   | 2,718,253 |   |
|                                          |        |                                             |         |                                            |        |  |  |  |  |  |  |  |  |

 

Assets assigned to the business segments include accounts receivable,inventories, fixed assets, spare parts and goodwill.  No single customer accounted for 10% or more of revenues.

 

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8.             Subsequent Events

 

On March 11, 2004, Alcide entered into anAgreement and Plan of Merger with Ecolab Inc., which was approved by Alcide’sboard of directors.  Under the terms ofthe agreement, a wholly-owned subsidiary of Ecolab will merge with and intoAlcide, and Alcide will survive as a wholly-owned subsidiary of Ecolab.  Each stockholder of Alcide will receive$21.00 per share of Alcide common stock, to be in shares of Ecolab common stockbased on the average of Ecolab’s closing stock price for a ten-day periodending on the fifth day prior to the effective date of the merger.  Holders of outstanding options to purchaseAlcide common stock that have an exercise price equal to or greater than $21.00per share will receive a cash payment of such options equal to $21.00, subjectin certain instances to the consent of such option holders.  Ecolab agreed to assume options held bycertain holders of outstanding options who do not consent to receive a cashpayment of $21.00 per share.  Certainstockholders of Alcide who hold in the aggregate approximately 22.4% of theoutstanding stock of Alcide have entered into voting agreements with Ecolabwhich provide that they will vote their shares in favor of the acquisition.  The transaction is anticipated to be atax-free reorganization for income tax purposes.  The consummation of the merger is subject to the approval ofAlcide’s stockholders and other customary closing conditions.

 

On March 15, 2004, a complaint was filed against Alcide and itsDirectors in the King County Superior Court of the State of Washington.  The complaint which purports to be broughtas a class action alleges that Alcide’s Directors breached their fiduciaryduties in connection with their approval of the Ecolab Merger Agreement andseeks to enjoin the transaction.  TheCompany believes that the actions of the Company and the Board wereappropriate.

 

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PART  I

 

ITEM 2.                  Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

Introduction

Alcide Corporation (the “Company” or“Alcide”) is a Delaware Corporation organized in 1983 which has its executiveoffices and research laboratories at 8561 154th Avenue N.E.,Redmond, Washington 98052.

 

Alcide is engaged in research, developmentand commercialization of unique chemical compounds having intense microbiocidalactivity.  The Company holds substantialworldwide rights to its discoveries through various patents, patentapplications, trademarks and other intellectual property, technology andknow-how.

 

The Company reports and controls its businessthrough two business segments:

 

•                  Animal Health andSurface Disinfectants.   This segmentincludes products sold to the dairy industry for prevention of mastitisinfections in dairy cows under the trade names UDDERgold® UDDERgold Plus®, UDDERgold Platinum®, UDDERgold5-Star, 4XLA® and Pre-Gold®.  All of the Company’s Animal Health revenue is generated throughsales to distributors and license revenue from one distributor.  These distributors re-sell directly to dairyfarmers and farm cooperatives.

 

 This business segment also includes a line ofsterilants and disinfectants under the trade names of Exspor® and LD®sold predominantly to the health care industry to reduce the potential fordisease transmission via contaminated surfaces.

 

•                  SANOVA FoodAntimicrobial Products.  SANOVA is anantimicrobial solution sold to poultry and meat slaughter operations and foodprocessing companies for control of food borne pathogens such as *Salmonella,**E-coli*015787, *Listeria*, and *Campylobacter.*  All SANOVA sales to date have been direct tothe end customer/user.  Typically, theSANOVA components are delivered to the customer’s site in bulk concentrate formthen, at the time of use, the components are automatically mixed, diluted anddispensed through a PLC controlled mixing apparatus supplied and owned byAlcide.

 

Risk and Uncertainties

 

This report includes forward lookingstatements which involve risk and uncertainty including, without limitation,risk of dependence on patents, trademarks, third party suppliers, marketacceptance of and demand for the Company’s products, distribution capabilitiesand the development of technology and governmental regulatory approval thereof.

 

Sentences or phrases that use words such as“believes”, “anticipates”, “hopes”, “plans”, “may”, “can”, “will”, “expects”and others are often used to flag such forward looking statements, but theirabsence does not necessarily mean a statement is not forward looking.  Forward looking statements reflectmanagement’s current opinion and are designed to help readers understandmanagement’s thinking.  By their verynature, however, such statements are subject to certain risks and uncertaintiesthat could cause actual results to differ materially from those expected orprojected.  Readers are cautioned not toplace undo reliance on these forward looking statements which speak only as ofthe date hereof.  The Company undertakesno obligation to release publicly any revisions to these forward lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

Risks and uncertainties that may affect theCompany’s operating results and business performance include:  the Company’s ability to protect its patentsand other proprietary rights; the volume and timing of product sales; pricing;market acceptance of its products; the costs and effects of complying with lawsand

 

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regulations relating to the environment andto the manufacture, storage, distribution and labeling of the Company’sproducts; the ability to develop and maintain distribution and supplyarrangements; the effect of the Company’s accounting policies; changes in tax,fiscal and governmental and regulatory policies; economic factors such as theworldwide economy, interest rates, currency rates and currency movements;changes in the capital markets affecting the Company’s ability to raisecapital; the occurrence of litigation or claims; the loss or insolvency of amajor customer, distributor or supplier; losses of or changes in executivemanagement; the Company’s ability to continue product introductions andtechnological innovations; and other uncertainties and risks reported from timeto time in our reports filed with the Securities and Exchange Commission.  In addition, the Company notes that itsstock price can be affected by fluctuations in quarterly earnings.  There can be no assurance that the Company’searnings level will meet investors’ expectations.

 

The March 11, 2004 announcement of theproposed transaction with Ecolab could have an adverse effect on the revenue ofthe Company in the near-term if customers delay, defer or cancel purchasespending consummation of the planned transaction due to potential uncertaintyabout the direction of the combined company’s product offerings and its supportand service of existing products.  Tothe extent that the Company’s announcement of the transaction createsuncertainty among customers such that one or more large customers, or asignificant group of small customers, delays purchase decisions pendingconsummation of the planned transaction or cancels existing agreements, the resultsof operations of the Company could be negatively affected.  Decreased revenue could have a variety ofadverse effects, including negative consequences to the Company’s relationshipswith, and ongoing obligations to, customers, suppliers and others with whom theCompany has business relationships.  Inaddition, any resulting negative impact on the Company’s quarterly operatingresults and revenue could cause a decline in the stock price of the Company.

 

If the planned merger with Ecolab is notcompleted, the Company could suffer a number of consequences that may adverselyaffect the Company’s business, results of operations and stock price, includingthe following:

 

•                  Alcide would notrealize the benefits we expect from becoming part of a combined company withEcolab, including the potentially enhanced financial and operational position;

 

•                  activities relatingto the merger and related uncertainties may divert management’s attention fromthe Company’s day-to-day business and cause disruptions among the Company’semployees and to its relationships with customers and business partners, thusdetracting from the Company’s ability to increase revenue and minimize costsand possibly leading to a loss of revenue and market position that the Companymay not be able to regain if the transaction does not occur;

 

•                  the market price ofthe Company’s common stock could decline following an announcement that themerger has been abandoned, to the extent that the current market price reflectsa market assumption that the merger will be completed;

 

•                  Alcide could berequired to pay Ecolab a $2.5 million termination fee if the merger agreementis terminated under certain specified conditions;

 

•                  Alcide would remainliable for certain costs related to the transaction, such as legal, accounting,financial advisor and financial printing fees; and

 

•                  Alcide may not beable to take advantage of alternative business opportunities or effectivelyrespond to competitive pressures.

 

Substantially all of the Company’s productsare subject to regulatory approval of or control by various governmentalagencies such as the FDA, USDA and EPA in the United States and theirequivalents in international markets. The exercise of control and regulatory authority by these agencies canhave a material effect on the Company’s business directly as it relates to theCompany’s products and indirectly as it relates to competitors’ products.

 

Within the Animal Health and SurfaceDisinfectant business segment, all of the Company’s Animal Health products aresold through distributors having exclusive or semi-exclusive rights tospecified geographical

 

13

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territories. The loss of a distributor can have a material effect on the Company’ssales, particularly, in the short-term until a replacement is found, contractedand trained in the sale of the Company’s products.  Further, the Company faces well established competition in eachof the markets where its Animal Health products are sold. Such competition,particularly competition claiming equivalence to the Company’s products, canlimit the sales potential for Alcide’s products.

 

Alcide’s SANOVA Food Antimicrobial productsparticipate in a rapidly evolving marketplace which by its nature attractsinnovation and competing technologies. The Company’s SANOVA sales are based on performance, price andconvenience.  Introduction ofcompetitive products better meeting these customer needs can have a materialimpact on the Company’s ability to sell and expand the use of its SANOVAproducts.

 

The Company’s business model for its SANOVAbusiness involves a capital investment ranging from $20,000 to $500,000 foreach user plant site (depending on the size of the operation to mix, dilute anddistribute SANOVA).  The capital investmentsare depreciated over a five-year life while customer contracts range from oneto four years.  If a substantial numberof customers elect not to renew their contracts, non-productive assets wouldexist until new customers are found.

 

Occasionally, the Company also incursinstallation costs of between $80,000 and $120,000 to install the SANOVAequipment components at the customer site and connect the components withplumbing and electrical interfaces to put the system into operation.  Installation costs are depreciated over theshorter of a five-year life or the contract term.

 

The economic vitality of the industriesserved by the Company’s products can have an impact on Alcide’s ability to sellits products, expand sales and maintain product price levels.  Within the Animal Health business segment,the Company’s products are premium priced consistent with their superiorperformance. However, as dairy industry product margins are compressed, somefarmers may discontinue the use of Alcide products in favor of lower pricedcompetitors’ products.   Likewise, the Company’s ability to sell andexpand sales of its Food Safety products may be impacted by economic conditionswithin the poultry and red meat industries.

 

Critical Accounting Policies

 

•                                                Revenue Recognition

Revenue from sales of SANOVA is recognizedbased on the terms of the Company’s contracts with individual customers.  For customers using more than 15,000 gallonsof SANOVA per month, Alcide provides bulk shipments of inventory to thecustomer and the customer is invoiced at month-end with revenue recognizedbased on the amount of product processed or gallons of SANOVA used.  All other customers are invoiced and revenueis recognized at the time SANOVA is shipped to their facilities. Payment in eithercase is due fifteen to thirty days after billing.

 

Animal Health and Surface Disinfectant salesare recognized at the time of shipment to distributors or to end users.  The Company provides a limited warranty toits distributors which limits the Company’s obligation to replacement ofdefective product.  Such replacementshave, for the past several years, been less than .1% of net sales.  The distributors have no contractual rightto return unsold product. Payment terms are generally sixty days for internationaldistributors and thirty days for domestic distributors.

 

•                                                Depreciation andBook Value of SANOVA Plant Assets

Capital investments for SANOVA plant assetsare depreciated over a five-year life, while customer contracts range from oneyear to four years.  As the SANOVA foodantimicrobial business has been in existence for just over five years, theCompany has a limited, practical basis on which to assign depreciablelife.  Management believes, however,based on five years experience in three plants, that well-maintained assetswill be operational beyond five years and, further, that if customers decidenot to renew their contracts major portions of the assets can be relocated tonew customer sites.  As of February 29,2004, plant assets from four installations have been redeployed to new sites.The cost to maintain the assets is charged to operations.

 

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Commitments and Contingencies

 

Leases: The Company leases certain property under non-cancelable operatingleases that expire through July 2009. Insurance, utilities and maintenance expenses are borne by theCompany.  There are no contingentrentals or subleased rentals.

 

SANOVA Agreements:  The Company has signed contracts with poultry and beef processingplants for SANOVA systems to be installed in the fourth quarter of FY 2004 andfirst quarter of 2005 which will cost approximately $3.0 million.  As of February 29, 2004, $1.2 million of theequipment required was on hand for these installations.

 

Employment Agreements:  One officer has a one year, automaticallyrenewable, employment agreement which currently obligates the Company to a basesalary of $287,929 per year.  Bonuscompensation of 100% of base pay can be earned at the discretion of the Boardof Directors.

 

Preferred Stock:  On September 30th of each year, the Company redeems a portion ofits outstanding Series 2 Class “B” Preferred Stock.  The amount redeemed is equal to .7% of the Company’s prior yearnet income.  As the Company recorded netincome of $1,129,610 in fiscal 2003, it redeemed 3,012 shares of Series 2 Stockon September 30, 2003 for $7,906.  Thisleaves a total of $159,239 of Class “B” Preferred Stock to be redeemed.  The Company also has a Class “A” PreferredStock having a value of $18,636.  Theprovisions of the Class “A” Preferred allow the Company to redeem the stock atits face value.  The Ecolab MergerAgreement requires the Company to redeem all of the outstanding Class “A” andClass “B” Preferred stock and, therefore, the amounts to be redeemed are$177,875.

 

The following table summarizes the abovecommitments:

 
|                          |   | **Less than 1 year** |      | **FY 2005** |   | **FY 2006** |   | **FY 2007** |    | **FY 2008** |   | **FY 2009** |   |
|-------------------------------|--------|----------------------|-----------|-------------|--------|-------------|--------|-------------|---------|-------------|--------|-------------|--------|
|                          |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| Operating Leases              |   | $                    | 62,647    |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |
|                          |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| SANOVA  Agreements            |   | 1,100,000            |      | 700,000     |   | —      |   | —      |    | —      |   | —      |   |
|                          |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| Preferred Stock  Redemption   |   | 177,875              |      | —      |   | —      |   | —      |    | —      |   | —      |   |
|                          |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| Employment Agreements         |   | 287,929              |      | —      |   | —      |   | —      |    | —      |   | —      |   |
|                          |   |                 |      |        |   |        |   |        |    |        |   |        |   |
| Total Contractual Commitments |   | $                    | 1,628,451 |        | $      | 835,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |

 

Financial Condition and Results of Operations

 

Management Overview

 

On March 11, 2004, Alcide announced an agreement tobe acquired by Ecolab Inc. (“Ecolab”) in a merger transaction.  The proposed transaction is anticipated toclose late in the fourth quarter of fiscal 2004 or in the first quarter offiscal 2005.  The announcement of thetransaction and actions taken by the Company in preparing for the submission ofthe transaction to the stockholders and in planning for the integration withEcolab may impact the results of operations and liquidity of the Company infuture periods.  For more information onthe proposed merger see “Other Information” on page 19 and for more informationon the risks associated with the merger agreement see “Risks and Uncertainties”above.  A proxy statement/prospectuswill be filed with the Securities and Exchange Commission in connection withthe proposed merger.  The proxy statement/prospectuswill be

 

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mailed to all holders of our stock and will containimportant information about Alcide, Ecolab and the proposed transaction, risksrelating to the transaction and the combined company, and related matters.  The Company urges all of its stockholders toread the proxy statement/prospectus when it becomes available.

 

The economic conditionsin the meat and poultry processing industries have stabilized.  Within the poultry industry, processors andthe Department of Agriculture have successfully met the challenges posed by therecent Avian Influenza outbreak to a far greater degree than internationalcompetitors in China, the Netherlands and Thailand.  This coupled with an increase in the export quota to Russia haveled to improved product pricing for U.S. poultry processors.  Alcide expects to add three major newpoultry customers during the fiscal fourth quarter.

 

The beef processingindustry has also reacted appropriately to the recent “mad cow” scare andeconomic conditions within the industry appeared to have stabilized.  During the fourth quarter of fiscal 2004,the Company expects to start SANOVA application in ten to fifteen beefoperations.

 

The Animal Health and Surface Disinfectant businessunit has been helped by improving U.S. milk prices however, sales of theCompany’s ancillary product lines were down for the quarter because of aninventory build up in the second quarter. In the second quarter, UDDERgold Platinum, the next generation UDDERgoldproduct, was launched in the Netherlands as we continue the strategy ofreplacing global UDDERgold sales with UDDERgold Platinum.

 

Alcide’s net cashprovided by operating activities was $4,253,285 for the nine month period endedFebruary 29, 2004 versus $2,740,074 for the equivalent nine month period lastyear.  The Company has no debt and itscash and cash equivalents on February 29, 2003, were $4,567,517 an improvementof $2,280,876 since May 31, 2003.  TheCompany expects to fund its existing operations and growth with its currentcash balance plus cash generated by operations.  If growth exceeds current expectations, it may be necessary todraw on the Company’s line of credit.

 

Net Sales

 

Net sales and license revenue totaling $5,843,792for the quarter ended February 29, 2004, were 6% higher than the equivalentquarter last year.  Fiscal 2004 ninemonth net sales and license revenue of $17,269,704 were 6% higher than ninemonth sales in fiscal 2003.

 

Sales of SANOVA food antimicrobial to the foodprocessing industries totaled $3,723,277 for the quarter ended February 29,2004, an amount $499,542, or 15% higher than for the third fiscal quarter lastyear.  SANOVA sales during the ninemonths ended February 29, 2004, were $11,033,097 an amount $911,904, or 9%higher than the nine months last year.

 

The Company’s Animal Health and SurfaceDisinfectant revenues for the quarter ended February 29, 2004 were $2,120,515including $321,974 in license revenue. During the third quarter last fiscal year, Animal Health and SurfaceDisinfectant revenues were $2,279,859 including $330,722 in licenserevenue.  During the fiscal nine months,the Company’s Animal Health and Surface Disinfectant revenues were $6,236,607including $917,387 in license revenue as compared to fiscal 2003 nine monthrevenue of $6,206,145 which included $590,876 in license revenue.

 

Cost of Goods Sold, Exclusive of Impairment Charges

 

The cost of goods sold before SANOVA plant assetimpairment charges was 59% of total revenue for the quarter and 58% of totalrevenue for the nine month period ended February 29, 2004 as compared to 56%for the quarter and 55% for the corresponding nine month period one year ago.

 

SANOVA business segment cost of goods sold were 69%of SANOVA sales for the quarter ended February 29, 2004, as well as for theequivalent quarter last year.

 

Cost of goods sold before plant asset impairmentcharges for the SANOVA business segment was 68% for the nine month period endedFebruary 29, 2004, as compared to 64% of net sales for the same period lastyear.  The four point

 

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increase in cost of goods as a percentage of saleswas caused by three factors.  SANOVA rawmaterial usage increased in six plants as a result of a transition topost-chill dip operations.  Secondly,the unabsorbed depreciation expense related to underutilization of equipmentidled in the first quarter of 2003 continued through fiscal 2004 and lastly,capital investments made to transition to post-chill operations added to thedepreciation expense component of cost of goods.

 

Cost of goods sold for the Animal Health andSurface Disinfectant business unit segment was 48% of net sales (excludinglicense revenue) for the quarter and 46% for the nine month period endedFebruary 29, 2004 as compared to 45% of net sales for the quarter and the ninemonth period last year.  The increasewas caused primarily by product mix favoring growth in the lower margin ancillaryproduct lines.

 

Research and Development Expense

 

Expenditures for the quarter ended February 29,2004 were $550,180 an amount 6% higher than for the equivalent period lastyear.  The increase reflects primarilythe timing of expenditures as nine month R&D expenses of $1,499,771 were$174,865 or 10% lower than for the first nine months of fiscal 2003 reflectingthe conclusion of development activities related to the Company’s new animalhealth products and reduction in the scope of SANOVA process validation trials.

 

Selling, General and Administrative Expense

 

Fiscal 2004 third quarter expenses of $1,542,210were $111,831 higher than third quarter expenses in fiscal 2003.  Nine month expenses of $4,855,250 were$499,293 higher than for the first nine months last year. The expense increasewas caused predominantly by the patent infringement lawsuit against Bio-CideInternational ($416,579 for the nine month period).

 

In connection with the proposed acquisition ofAlcide by Ecolab, Alcide incurred significant legal and financial advisorexpenses, $250,000 of which was reimbursed by Ecolab on March 16, 2004 pursuantto the terms of the merger agreement. The Company expects general administrative costs to increase in thecoming period as a result of expenses incurred in connection with the proposedacquisition of the Company by Ecolab, regardless of consummation of thetransaction, which expenses will be offset in part by Ecolab’s agreement toreimburse the Company, subject to certain limitations, for certain of theseexpenses.  In addition, if the mergeragreement with Ecolab is terminated by Ecolab because its stock price for theten-day period ending on the fifth day prior to the effective date of themerger is less than $21.00 per share, Alcide will be entitled to receivereimbursement for certain expenses Alcide incurs in connection with thetransaction.

 

Interest Income

 

Interest income was $5,772 for the quarter and$14,036 for the nine month period ended February 29, 2004 versus $5,945 and$20,012 for the quarter and nine month period last year.  The decrease was due to lower prevailingshort-term interest rates.

 

Interest Expense

 

The Company incurred no interest expense for eitherthe quarter or nine month period ended February 29, 2004.

 

Outlook

 

•                                          Animal Health and Surface Disinfectant Products

Theworldwide dairy herd continues to decline but milk supplies continue to grow asa result of the implementation of modern dairy farming practices including theuse of superior teat dip products like those sold by the Company.  This increase in supply has caused milkprices in key European markets to decline over the past several years puttingpressure on the profitability of dairy farms in those markets.  Recently the global trend of lower milkprices has reversed in the U.S. for a number of reasons including

 

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areduction in the use of Somatatropin, a hormone used to enhance milkproduction.  The Company faces increaseddirect competition from products similar to its products, UDDERgold, UDDERgoldPlatinum, UDDERgold 5-Star and 4XLA. The Company’s strategy is to maintain a performance edge over competingproducts. However, with increasing regulatory demands on animal health productsin key global markets the time required to introduce enhanced products islonger than the Company anticipated. Because Alcide sells through distributors, both changes in thedistribution network and the introduction of new products can cause theCompany’s sales to shift from quarter to quarter as distributors increase or decreasetheir inventories of Alcide products. On an ongoing basis, management believes that its distribution network,combined with Alcide’s evolving new product introductions, will enable theCompany to maintain its share of market. In the short-term, the recently improved pricing for milk products is apositive business factor for the Company’s premium priced products in the U.S.marketplace.  The recent “mad cow”incident has not had a major negative impact on the U.S. dairy industry but newregulations implemented by USDA have been projected to negatively impact dairyprofitability in the short run.

 

•                                          SANOVA

Management expects that thesize of the Company’s food antimicrobial business will continue to expand. Thepoultry industry has continued to recover from last year’s economic downturnand as a result Alcide has been able to redeploy SANOVA systems from four ofthe idled sites to new customer operations. During the nine months endedFebruary 29, 2004, the Company started four new poultry operations and sevennew red meat operations.  Subsequent toFebruary 29, 2004, one new poultry operations and six new red meat operationshave been added.  Contracts are in-handto start eighteen additional new operations within the next two quarters.

 

ITEM3.Quantitative and Qualitative DisclosuresAbout Market Risk

 

TheCompany is not significantly exposed to market risks from changes in interestrates. At its present growth rate, the Company expects to be in a balanced cashposition during fiscal 2004.  The Company’spolicy is to invest any excess cash resources in low risk, short-term andintermediate-term U.S. Treasury instruments and bank money market funds tominimize market risks.

 

TheCompany has no direct foreign currency exposure.  All of its present transactions with international distributorsare denominated in U.S. dollars.

 

ITEM 4.Controlsand Procedures

 

a)   The Company’s Chairman andCEO, and President and CFO, after evaluating the effectiveness of the Company’s“disclosure controls and procedures” (asdefined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c))as of the end of the period covered by this quarterly report, have concludedthat, as of that date, the Company’s disclosure controls and procedures wereadequate and designed to ensure that material information relating to theCompany and its consolidated subsidiary would be made known to them by otherswithin those entities.

 

b)   There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and proceduressubsequent to the end of the period covered by this quarterly report.  There were no significant deficiencies ormaterial weaknesses, and therefore, there were no corrective actions taken.

 

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PART II

 

OTHER INFORMATION

 

ITEM1.Legal Proceedings

 

On March 8, 2004, Alcide Corporation andBio-Cide International Inc., through their attorneys, confirmed that theMemorandum of Understanding signed by both parties on October 2, 2003 is thefinal agreement of the parties with regard to settlement of the lawsuit betweenAlcide and Bio-Cide.

 

On March 15, 2004, a complaint was filedagainst Alcide and its Directors in the King County Superior Court of the Stateof Washington.  The complaint whichpurports to be brought as a class action alleges that Alcide’s Directorsbreached their fiduciary duties in connection with their approval of the EcolabMerger Agreement and seeks to enjoin the transaction.  The Company believes that the actions of the Company and theBoard were appropriate.

 

ITEM5.Other Information

 

On March 11, 2004, Alcide issued a press release announcing theexecution of an Agreement and Plan of Merger, dated as of March 11, 2004 (the“Merger Agreement”), by and among Ecolab, Bessy Acquisition Inc., a Delawarecorporation and wholly-owned subsidiary of Ecolab (“Merger Sub”), andAlcide.  In accordance with the MergerAgreement, Merger Sub will merge with and into Alcide, and Alcide will surviveas a wholly-owned subsidiary of Ecolab. In the transaction, each stockholder of Alcide will receive $21.00 pershare of Alcide common stock, to be paid in shares of Ecolab common stock basedon the average of Ecolab’s closing stock price for a ten-day period ending onthe fifth day prior to the effective date of the merger.

 

The consummation of the merger is subject to the approval of thestockholders of Alcide and other customary closing conditions.  The merger is intended to be a tax-freereorganization under Section 368 of the Internal Revenue Code of 1986, asamended and is expected to be treated as a purchase for financial accountingpurposes, in accordance with generally accepted accounting principles.

 

In connection with the Merger Agreement, certain stockholders ofAlcide, including executive officers and directors of Alcide and certain oftheir affiliates, entered into voting agreements with Ecolab in which, amongother things, each such stockholder agreed, until the earlier of the consummationof the merger or the termination of the Merger Agreement, to vote shares ofAlcide common stock in (i) favor of the adoption of the Merger Agreement andapproval of the merger and (ii) against the approval of any proposal that wouldresult in a change in the directors of Alcide, any change in the presentcapitalization of Alcide, any amendment to Alcide’s Certificate ofIncorporation or Bylaws, a breach by Alcide of the Merger Agreement, impairAlcide’s ability to perform its obligations under the Merger Agreement orotherwise prevent or materially delay the consummation of the merger and theother transactions contemplated by the Merger Agreement.  These stockholders collectively ownapproximately 22.4% of the outstanding Alcide stock as of March 11, 2004.

 

The foregoing description of the Merger Agreement and voting agreementsdoes not purport to be complete and is qualified in its entirety by the termsand conditions of the Merger Agreement and voting agreements.  Copies of the Merger Agreement and otherdocuments related to the transaction are attached as exhibits to the CurrentReport on Form 8-K Alcide filed with the Securities and Exchange Commission onMarch 12, 2004.

 

ITEM6.Exhibits and Reports on Form 8-K

 

a)  Exhibits:

 

31.1         Certificationof Periodic Report by Chairman and Chief Executive Officer of Corporation.

 

31.2         Certification of Periodic report by President and ChiefFinancial Officer of Alcide Corporation.

 

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32.1         Certification pursuant to 18 U.S.C. Section 1350.

 

b)  Reports on Form 8-K:

 

Report on Form 8-K dated January 14, 2004 reporting results ofoperations for the quarter ended November 30, 2003.

 

Report on Form 8-K dated March 11, 2004 announcing the execution of amerger agreement with Ecolab.

 

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SIGNATURE

 

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                  |   |                                 | ALCIDE  CORPORATION      |
|-----------------------|--------|--------------------------------------|--------------------------|
|                  |   |                                 | The  Registrant          |
|                  |   |                                 |                     |
|                  |   |                                 |                     |
| Date:  April 12, 2004 |   | By  /s/   John P. Richards |                     |
|                  |   |                                 | John  P. Richards        |
|                  |   |                                 | President                |
|                  |   |                                 | Chief  Financial Officer |

 

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